20221117-招银国际-腾讯控股-00700.HK-Return_to_earnings_growth_track_8页_1mb

Tencent (700 HK) Summary

Core Content

Tencent reported its 3Q22 results, showing a total revenue decline of 1.6% YoY but a 4.5% QoQ growth to RMB140.1bn, aligning with market expectations. The company's Non-IFRS net income rose 1.6% YoY and 15% QoQ to RMB32.3bn, surpassing the consensus estimate by 7%. This performance was driven by effective cost control in S&M expenses (-32% YoY) and staff costs (low single-digit YoY growth), as well as improved gross profit margin (GPM) from better-than-feared ad revenue growth.

Main Segments Performance

• Domestic Games: Revenue declined 7% YoY to RMB31.2bn, with expectations of continued YoY decline in 4Q22E due to a lack of new game titles.
• International Games: Revenue increased 3% YoY to RMB11.7bn.
• Online Advertising: Revenue fell 5% YoY to RMB21.5bn, but the performance was better than expected. The WeChat ecosystem showed resilience, with Video Account expected to surpass RMB1bn in quarterly revenue in 4Q22E.
• Fintech and Business Services: Revenue grew 4% YoY to RMB44.8bn, with fintech growth accelerating due to commercial payment volume recovery.
• Cloud Business: Continued strategic adjustments, with a slight YoY revenue decline but improved gross profit growth.

Key Takeaways from Management Call

• Regulations are aimed at promoting industry health and Tencent is making progress across all business areas.
• Tencent expects more game licenses in 2023 and is working with regulatory bodies to better govern its fintech business.
• The company received approval for investment in Samsung Property and Casualty Insurance Company (China).
• Tencent is focusing on long-term scale expansion in enterprise services, such as launching a subscription bundle for SaaS services.
• Key growth drivers include Video Account monetization, international game studios, scalable SaaS products, WeChat commerce ecosystem, and technology infrastructure.

Financial Forecasts and Valuation

• Non-IFRS Net Income: Raised forecasts for FY22-FY24 by 1-3%, with expectations of further earnings growth driven by ad recovery and improved operating efficiency.
• Target Price: Raised SOTP-based target price to HK$401.8 from HK$398.0, with a 36.5% upside from current price (HK$294.40).
• SOTP Breakdown (HK$ per share):
  • Online Games: HK$153.4, based on 18x 2023E PE.
  • SNS Business: HK$26.3, including Tencent Video (3.0x 2023E PS) and other membership services (2.0x 2023E PS).
  • Advertising Business: HK$24.7, based on 15x 2023E PE, reflecting Tencent's strong ecosystem.
  • Fintech: HK$97.1, based on 5.0x 2023E PS, at a discount to peer average due to regulatory pressure and lower margins.
  • Cloud: HK$16.0, based on 3.5x 2023E PS, at a discount to industry average.
  • Strategic Investments: HK$70.5, based on fair value of equity investments with a 30% holding company discount.
  • Net Cash: HK$13.8.

Valuation Comparison

• Peer Comparison:
  • In the online games sector, Tencent's PE is on par with global gaming peers.
  • In the online advertising sector, Tencent's PE is at a premium to the industry average.
  • In the fintech sector, Tencent's PS is at a discount to peer average.
  • In the cloud sector, Tencent's PS is at a discount to the industry average.

Financial Summary

• Revenue: Expected to grow from RMB555.8bn in FY22E to RMB662.6bn in FY24E.
• Non-IFRS Net Profit: Projected to increase from RMB116.5bn in FY22E to RMB149.9bn in FY24E.
• Gross Margin: Improved from 43.0% in FY22E to 43.1% in FY24E.
• Operating Margin: Increased from 24.8% in FY22E to 25.4% in FY24E.
• Adjusted Net Margin: Rose from 20.3% in FY22E to 22.1% in FY24E.

Shareholding and Performance

• Shareholding Structure:
  • MIH TC: 28.7%
  • Advance Data Services Limited: 8.4%
• Share Performance:
  • 1-mth: +18.1% absolute, +7.3% relative
  • 3-mth: -2.8% absolute, +5.5% relative
  • 6-mth: -15.9% absolute, -8.1% relative

Conclusion

Tencent is on track to return to earnings growth, with a raised target price of HK$401.8. The company is leveraging its ecosystem and improving operating efficiency to drive growth, particularly in the advertising and fintech sectors. Despite challenges in the domestic games segment, Tencent remains optimistic about future recovery and continues to focus on long-term value creation through strategic investments and scale expansion.